Legg bails out 2 money funds

$1.1 billion deal aids Irish, Canadian units

December 29, 2007|By Laura Smitherman | Laura Smitherman,Sun reporter

Legg Mason Inc. reported yesterday that it would take a $90 million charge in the fiscal third quarter - and a 15-cent hit to its earnings per share - as the company undertook the biggest bailout by a money manager related to debt sold by structured investment vehicles (SIVs).

The Baltimore money manager pumped $1.1 billion into two foreign money market funds to prevent losses. The move follows an earlier cash infusion of $100 million and an arrangement for letters of credit to back up money funds offered by the company.

Structured investment vehicles sold commercial paper - some backed by subprime mortgages - that lost value as investors feared the debt would be affected by rising home-loan defaults. Bank of America Corp. and SunTrust Banks Inc. also have propped up funds with SIV-issued debt in the past month to prevent losses for investors. Money market funds are considered among the safest bets for investors. SIVs were popular investments for money funds looking to increase yields.

Legg Mason said yesterday that, while it can't give guarantees, it is "confident" that its money market funds "will continue to maintain a stable net-asset value."

When the net-asset value of a money market fund drops below $1 a share - a rare occurrence known as "breaking the buck" - investors lose money.

"These actions are further evidence of our continuing support of our liquidity products in light of current unprecedented market conditions," said Chairman and Chief Executive Officer Raymond A. "Chip" Mason in a statement.

In addition to problem investments by its money market funds, Legg Mason clients have pulled billions of dollars from its mutual funds. Its star stock picker Bill Miller continues a losing streak in his Value Trust fund, which had set a record for beating its benchmark index.

The company also is facing a major transition. It is expected to soon announce a successor who would take over the CEO post from Mason, who is 71 years old and plans to retire.

Legg Mason shares, which have plunged 25 percent this year, fell 41 cents, or less than 1 percent to $71.23 yesterday on the New York Stock Exchange. The company announced its plan for the two money market funds after U.S. markets had closed.

In the fiscal second quarter, Legg Mason had net income of $178 million, or $1.23 per share. The company's fiscal third quarter ends Monday.

The company shored up an Irish money market fund through an agreement with Barclays Bank PLC, which purchased $832 million in securities issued by SIVs. Legg Mason also provided $83 million in cash as collateral in the agreement with Barclays, and purchased $231 million in securities from the Irish fund and a Canadian fund.

Under the agreement with Barclays, Legg Mason is responsible for any losses incurred by the bank through November 2008.

The move by Legg Mason follows action by Moody's Investors Service this month to lower the company's debt outlook to "negative" because of possible losses from SIVs in money market funds. In November, Fitch Ratings cut its outlook on Legg Mason, noting investments in debt issued by SIVs.